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FRM Part II · FRM Exam Part II · Contingency Funding Planning

A bank's stress test shows survival of 45 days under a combined scenario, versus a board-approved minimum survival horizon of 60 days. Daily stressed net outflow averages USD 40 million, and the current buffer is USD 1,800 million. Management proposes raising the buffer so the bank survives 60 days, assuming outflows are unchanged and the new buffer assets suffer a 20% haircut in stress. What additional market value of unencumbered securities must be added?

An additional USD 750 million market value of securities is needed. Sixty days at 40 million daily outflow requires 2,400 million, the bank holds 1,800 million, so 600 million more post-haircut liquidity is required, which at a 20% haircut means 600 divided by 0.8, or 750 million.

  1. AUSD 600 million
  2. BUSD 750 millionCorrect
  3. CUSD 480 million
  4. DUSD 900 million

Explanation

Required buffer for 60 days = 60 x 40 = 2,400 million. Existing 1,800 gives 45 days. Shortfall = 600 million of post-haircut value. Market value needed = 600 / (1-0.20) = 750 million. The 600 option ignores the haircut.

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